What You Should Know about Cost Management Plans for the PMP Certification Exam

Because the cost of a project is often the first thing that management is interested in, you will definitely see it on the PMP Certification Exam. The budget for a project is one of the most important documents in the project management plan. The cost management plan describes units of measure, levels of accuracy, and variance thresholds, among other things, for the budget.

Cost management plan. A component of the project or program management plan that describes how costs will be planned, structured, and controlled.

Plan Cost Management: Inputs

When developing a cost management plan, you should reference the project charter and the project management plan. The project charter contains the summary level budget. The project management plan contains the scope and schedule baselines.

Enterprise environmental factors (EEFs) and organizational process assets (OPAs) play a big role in this process. The EEFs that are most influential include

Market conditions: The ability to obtain resources at a reasonable rate

Published rate information: For example, rate guides for certain industries

Currency exchange rates for international projects

There are sure to be processes and procedures associated with developing project estimates and budgets. Other organizational process assets that you can use include lessons learned and information from prior similar project budgets.

Plan Cost Management: Tools and Techniques

Expertise from cost estimators, finance staff, and people with knowledge of the specific discipline and industry are often called on to analyze decisions, such as

Whether to make or buy components

Whether to buy or lease equipment

Which financial metrics to use to make decisions — such as net present value (NPV), breakeven point, payback period, or discounted cash flow

Plan Cost Management: Outputs

The cost management plan includes a description of how costs will be estimated, budgeted, and controlled. It defines the methods and techniques used throughout the project. Some common content includes

Planning information

How costs will be recorded: This could be hours, euros, yen, dollars, or some other metric.

The detail level of cost reporting: This defines whether you will report in 100s of dollars, or 1000s of dollars, or some other increment.

Determining which costs will be tracked on the project: Many organizations don’t track the costs of internal resources, such as people, equipment use, and so forth. On the other hand, if the project is being done under contract, labor will be tracked and billed at a specified rate — and perhaps an overhead rate will be assessed to account for indirect costs, such as overhead, executive salaries, and the like.

Systems used to track and report costs and also establish the links between cost and other artifacts and systems: For example, this defines whether costs are reported using the work breakdown structure (WBS) numbering structure or the company’s accounting codes.

Executing information

How and when cost information is collected: Your organization may have an automated system that allows the project manager (PM) to enter the costs for resources and assign those costs to a specific WBS item, or you may have to manually review monthly invoices to determine costs. Some organizations track costs weekly, others monthly. Whichever situation you’re in, you should document the expectations in the cost management plan.

How you will measure scope and budget performance: This is most commonly used in EV management, but defining measurement methods upfront helps reduce surprises for any project. For example, you can define whether you will collect costs weekly and compare them against progress, or when a deliverable is complete, or whether to use interim deliverable milestones to track costs.

When to record project costs for procured items: Should costs be recorded when the order is placed? Delivered? Used? Invoiced? Paid? Most organizations have accounting policies in place that define when to record costs for operations, but you will need to determine when to record them for project tracking up front to ensure reporting consistency.

Monitoring and controlling information

Information and metrics to be collected and reported

Reporting format

Control thresholds

Forecasting techniques

The PMBOK Guide references this information as a cost management plan. However, the exam specification that the exam is built from calls this a budget plan. Be prepared to see questions referencing either term on the exam.